State of Madhya Pradesh and Ors. vs Sirajuddin Khan

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

Court: supreme-court

Case Number: Civil Appeal No. 510/1963

Decision Date: 22 April 1964

Coram: J.C. Shah, S.M. Sikri, Subba Rao

In this case the Supreme Court recorded that the matter involved the State of Madhya Pradesh together with several other parties as petitioner and Sirajuddin Khan as respondent. The judgment was delivered on twenty‑second April 1964. The bench comprised Justice J. C. Shah, Justice S. M. Sikri and Justice K. Subbarao. The citation of the decision appears in the 1965 volume of the All India Reporter at page 198 and also in the 1964 Supreme Court Reports (seventh series) at page 838. The statutory provision under consideration was the Madhya Pradesh Abolition of Proprietary Rights (Estates, Mahals, Alienated Lands) Act, 1950, specifically Schedule 1, rule 2(2)(c). The headnote summarised that the respondent owned an estate which, under the Act, became vested in the State and entitled the owner to compensation calculated at a multiple of ten times the net income of the estate. The net income was to be determined by deducting from the gross income certain amounts, including the average income tax paid on the income derived from big forest during the thirty agricultural years preceding thirty‑first March 1951. The Compensation Officer, when computing the net income, deducted not only the income tax but also the super tax. The respondent challenged the deduction of super tax before the Settlement Commissioner. After the Commissioner rejected the appeal, the respondent filed a writ petition in the High Court, which held that the provisions of the Act, read together, did not permit the deduction of super tax in the calculation of compensation. The State then sought special leave to appeal to this Court.

The State’s argument, presented by counsel, contended that rule 2(2)(c) of Schedule 1 was intended solely to provide a method of ascertaining the net income of an estate and therefore no distinction could be drawn between income tax and super tax; the term “income‑tax” was argued to be used in a comprehensive sense that included super tax. The respondent’s counsel countered that historically and within the language of the Act, income tax and super tax were distinct duties, and that the former did not incorporate the latter. The Court held that two essential differences existed between the two taxes. First, although both taxes were levied on a person’s total income, income tax required the total income to be computed according to the classifications set out in section 6 of the Income‑Tax Act, whereas super tax was payable on the total income as ascertained without regard to those classifications. Second, super tax, except in a few instances, was payable directly by the assessee, while income tax could be paid either directly by the assessee or by deduction at source. Examining the language of rule 2(2)(c) of Schedule 1, the Court found it clear that the provision referred to income‑tax alone and did not encompass super tax.

The Court observed that the Income‑tax Act creates two distinct duties, namely income‑tax and super‑tax, and that the legislature consistently employed the term “income‑tax” in the relevant provisions. If the legislative intention had been to refer to both taxes, the text would have expressly mentioned “income‑tax and super‑tax”, and the omission of the latter therefore signals an intention to exclude it. The qualification that the income‑tax paid must relate to income earned from the big forest therefore necessarily excludes super‑tax, because under the Income‑tax Act super‑tax is never payable on such specific forest income, but only on total income. Having regard to the wording of rule 2(2)(c) of Schedule I to the Act, the Court concluded that the term “income‑tax” does not incorporate super‑tax. The Court then reviewed the relevant case law, citing Brooks v. Commissioner of Inland Revenue (1914) 7 T.C. 236, Bates in re Salmea v. Bates (1925) Ch. D. 157 and Reckitt v. Reckitt (1933) 1 I.T.R. 1. Thus, the deliberate inclusion of the word “income‑tax” and the silent exclusion of “super‑tax” together form a clear legislative indication of the scope intended by the statute. Consequently, any calculation of net income that relies on the phrase “income‑tax paid” must consider only the income‑tax component and must not incorporate super‑tax or surcharge amounts.

The appeal, granted by special leave, was catalogued as Civil Appeal No. 510 of 1963 and challenged a judgment and order dated 22 January 1960 of the Madhya Pradesh High Court in Miscellaneous Petition No. 35 of 1959. Counsel for the appellant, appearing on behalf of the State of Madhya Pradesh, argued that the purpose of rule 2(2)(c) was to provide a method for ascertaining the net income of an estate, and that no distinction should be drawn between income‑tax and super‑tax in that context. Counsel for the respondent, representing the former zamindar of Bhadra Estate, maintained that the statutory language clearly limited the deduction to income‑tax paid on income derived from the big forest and that super‑tax could not be included. The factual background indicated that the respondent was the zamindar of Bhadra Estate in Balaghat District, his holdings known as Bahela Zamindari comprising seventy‑eight villages, and that the Madhya Pradesh Abolition of Proprietary Rights (Estate, Mahals, Alienated Lands) Act, 1950, came into force on 26 January 1951. Under section 8 of the Act, the proprietary rights vested in the State, and the former zamindar became entitled to compensation for those rights in the villages covered by the Act. The amount of compensation was to be determined in accordance with the rules set out in Schedule I to the Act, specifically rule 8, which prescribed compensation at ten times the net income of the estate. Net income was defined as gross income reduced by, among other deductions, the average of the income‑tax paid on the income from the big forest during the thirty agricultural years immediately preceding 31 March 1951. On 30 November 1951, the Compensation Officer calculated the compensation payable to the respondent at Rs 2,21,330‑12‑6, having deducted from the gross figure not only the income‑tax but also the super‑tax and surcharge that the respondent had paid. The average income‑tax paid by the respondent over the preceding thirty years amounted to only Rs 3,760‑2‑9, whereas inclusion of the super‑tax and surcharge raised the average to Rs 7,070‑8‑0, thereby reducing the net yearly income of the estate by Rs 3,310‑5‑3. The respondent subsequently moved the Settlement Commissioner under section 15 of the Act for enhancement of the compensation, but the Commissioner affirmed the earlier order of the Compensation Officer. Thereafter, the respondent filed an application before the High Court invoking Articles 226 and 227 of the Constitution to quash the Compensation Officer’s order, and the High Court held, after construing the relevant provisions, that super‑tax should not be taken into account in computing the compensation. The State of Madhya Pradesh appealed the High Court decision, and the present appeal concerned whether the statutory phrase “income‑tax” in rule 2(2)(c) necessarily encompassed super‑tax.

In calculating the compensation, the officer originally included the super‑tax and surcharge, which raised the average tax amount to Rs 7,070‑8‑0. Because of this inclusion the net yearly income of the estate was lowered by Rs 3,310‑5‑3, and the compensation was paid on the basis of this reduced income figure. The respondent challenged this determination by moving the Settlement Commissioner under section 15 of the Act, seeking an enhancement of the compensation, but the Commissioner upheld the Compensation Officer’s order. Subsequently, the respondent instituted an application before the High Court under articles 226 and 227 of the Constitution, requesting that the order of the Compensation Officer be set aside. The High Court, after construing the relevant provisions of the Act, held that the super‑tax should not be taken into account when computing the compensation payable to the respondent. The State of Madhya Pradesh has now appealed against that judgment of the High Court. Counsel for the State submits that the purpose of rule 2(2)(c) is to provide a method for ascertaining the net income of an estate, and that in that context there can be no justified distinction between income‑tax and super‑tax, because both are required to be deducted from gross income in order to arrive at net income. The counsel further argues that the legislature employed the expression “income‑tax” in a comprehensive manner that includes super‑tax, noting that under the Income‑Tax Act super‑tax is merely an additional duty of income‑tax and therefore forms part of it. Counsel for the respondent‑assessee, on the other hand, contends that when a provision of an ex‑proprietary Act is being interpreted, the court must apply a strict construction, and under such a construction the term “income‑tax” does not encompass super‑tax. He illustrated his position by referring to the pertinent provisions of the Income‑Tax Act, emphasizing that super‑tax differs from income‑tax in its origin, description, scope, incidents and mode of collection. The core issue, therefore, is the correct interpretation of rule 2(2)(c) of the Schedule I rules to the Act. The relevant statutory language reads as follows: Section 8(1) of the Act provides that the State Government shall pay to every proprietor who is divested of proprietary rights a compensation determined in accordance with the rules contained in Schedule I. Rule 2(2) of Schedule I states that the net income of an estate or mahal in the Central Provinces shall be calculated by deducting from the gross income the sums under the following heads, namely: (c) the average of the income‑tax paid in respect of the income received from big forest during the period of thirty agricultural years preceding the agricultural year in which the relevant date falls. Rule 8(1) further provides that the amount of compensation in the Central Provinces and in Berar shall be ten times the net income determined in accordance with the rules herein contained. The combined effect of these provisions is that, for the purpose of ascertaining the net income of an estate, the average of the income‑tax paid on big‑forest income is a deductible item, and the question before the Court is whether the term “income‑tax” in that rule includes the super‑tax and surcharge.

For an estate, one of the items that may be deducted from gross income is the average amount of income‑tax paid on revenue derived from the big forest. That average is calculated by taking the sum of income‑tax paid during the thirty agricultural years that immediately precede the agricultural year in which the relevant date occurs, and then dividing by thirty. The compensation payable to the proprietor is fixed at ten times the net income that results after applying the deductions prescribed in the rules. The relevant date used for the average calculation is the date that the State Government specifies by notification under section three of the Act. For illustration, if the State Government declares the relevant date to be some day in the year 1951, the income‑tax paid from 1921 through 1951 forms the basis for determining the average. To understand why the rules refer separately to income‑tax and to super‑tax, a brief historical outline of the two levies is helpful. The Income‑tax Act of 1886 assessed a person on each source of earnings individually, without first aggregating the various sources into a total income. The 1918 Act was the first statute to introduce the concept of total income as the basis for determining the applicable tax rate. That statute also listed several heads of income under which an assessee’s earnings were to be charged. The 1922 Act expanded the framework by allowing a loss incurred under one head of income to be set off against profit earned under another head. Until the enactment of the 1922 Act, super‑tax had been levied as a distinct charge, originally created by the Super‑tax Act of 1917 and then replaced by the Super‑tax Act of 1920. Only with the 1922 Act did super‑tax become incorporated into the Income‑tax Act, although the two taxes continued to retain separate characteristics. Thus, even though both taxes now appear in the same statute, their distinctive features are preserved. A legal commentator describes the income‑tax provisions as follows: section three imposes tax on the total income, section four defines the scope of that income, and section six qualifies it. Sections seven through twelve then provide the machinery for measuring the total income and for assessing and recovering the tax. With respect to super‑tax, a separate chapter, Chapter IX, contains sections fifty‑five to fifty‑eight dealing exclusively with that levy. Section fifty‑five is the charging provision and provides that, in addition to the income‑tax for any year, an additional duty of income‑tax, called super‑tax, shall be levied on the total income of the preceding year. The rate or rates for that super‑tax are to be fixed each year by a Central Act. Section fifty‑six provides that, except in specified situations, the total income used to compute super‑tax is the same total income that has been assessed for income‑tax purposes. Section fifty‑six‑A excludes certain dividend receipts from the super‑tax liability. Section fifty‑eight paragraph one applies, by reference to super‑tax, the provisions of the Act that relate to the charge, assessment, collection and recovery of income‑tax. The language of Chapter IX therefore shows that super‑tax, although described as an additional duty of income‑tax, remains a separate levy with its own procedural regime.

In this judgment the Court observed that although super‑tax was described as an additional duty of income‑tax, it was not incorporated within the income‑tax framework and its separate identity was preserved. The statute provided a self‑contained chapter that dealt exclusively with the charge, assessment, collection and recovery of super‑tax. The Court noted that essential differences existed between the two levies, differences that arose not only from the explicit provisions laid down in Chapter IX but also from the deliberate omission of several specified sections of the Act with respect to super‑tax. Successive Finance Acts had also drawn a distinction between income‑tax and super‑tax. The Court clarified that it was not necessary to enumerate every difference; it was sufficient to recognise that the incidents of the two taxes were markedly distinct. The Court highlighted two particularly relevant distinctions. First, although both taxes were assessed on a person’s total income, the total income for income‑tax purposes was computed according to the classification of income under the various heads enumerated in section 6 of the Act, whereas super‑tax was levied on the total income as a whole without reference to those heads. Second, the Court explained that super‑tax, except in a few limited situations, was payable directly by the assessee, while income‑tax could be paid directly by the assessee as well as through deduction at source.

The Court then explained that, unlike income‑tax, super‑tax could not be traced back to a particular source of income because the liability for super‑tax arose only after the total income had been ascertained. The only conceivable way to apportion the tax would be to calculate a proportionate share based on the ratio of a specific source of income to the total income, but this method was not sanctioned by the statute. Consequently, it was legally impossible to determine what portion of super‑tax corresponded to a particular source of income, since total income alone was the determining factor and the breakdown of income by source was irrelevant. To illustrate, the Court stated that super‑tax was presently levied on income exceeding Rs 25,000. If a taxpayer “A” had a total income of Rs 35,000 consisting of Rs 20,000 from a big forest and Rs 15,000 from other sources, the Court affirmed that it was not possible to compute the amount of super‑tax attributable solely to the forest income. With this background, the Court examined rule 2(2)(c) of Schedule I to the Act. It observed that the legislative intention was clear from the express language used and from internal evidence. Knowing that the Income‑tax Act imposed two distinct duties—income‑tax and super‑tax—the Legislature deliberately employed the term “income‑tax” in the rule. Had the intention been to refer to both duties, the rule would have stated “income‑tax and super‑tax”. Thus, the inclusion of “income‑tax” and the omission of “super‑tax” demonstrated the legislature’s intent.

In its analysis, the Court observed that the explicit qualification requiring the income‑tax paid to relate to income received from the big forest clearly demonstrated that the provision did not intend to include super‑tax. Under the Income‑tax Act, super‑tax was levied only on the total income and could not be linked to the income arising from the big forest. Consequently, the Court explained that it was legally impossible to separate a portion of the super‑tax and allocate it to the income attributable to the forest. The super‑tax was payable solely on the aggregate income and not on the forest income taken alone. The Court further noted that if the appellant’s argument were accepted, the forest income, even though it fell below the taxable threshold, would be deducted when combined with other sources of income that together raised the total income above the taxable level; in such a scenario the super‑tax, which was not actually payable on the forest income, would nevertheless have to be deducted. Moreover, the rules formulated under the Act provided no mechanism for apportioning the super‑tax due on total income among the various sources of income. The Court acknowledged that a similar difficulty existed with income‑tax, which is also imposed on total income, but pointed out that the Act allowed income to be computed under separate heads. Therefore, describing a tax as attributable to a particular head of income was permissible for income‑tax, whereas it was wholly inappropriate to describe a part of the super‑tax as payable in respect of income from a specific source. The Court rejected the respondent’s counsel’s assertion that the reference to a thirty‑year period in the rule took the analysis back to a time when super‑tax did not exist, noting that super‑tax had been payable in some form since 1917. Even assuming a year without super‑tax, the Court held that such an omission did not affect the calculation of the average, because the income‑tax for that year would simply be the income‑tax without super‑tax, rendering the argument irrelevant. Finally, the Court dismissed the contention that the Legislature would have expressly mentioned super‑tax if it intended not to exclude it from gross income. It reasoned that, in an ex‑proprietary statute, the failure to mention one of two well‑known terms signaled a legislative intent to provide for deduction of the term that was included and to omit the other, and that the likely purpose of the rule was to allow only those deductions directly related to the net income of the estate.

In considering the rule that governs the calculation of net income from an estate after certain deductions, the Court observed that only those deductions which bear a direct relationship to that income may be permitted. The Court explained that if an alternative construction were adopted, the process would become uncertain because one would have to speculate about deductions, and a super‑tax that had not actually been paid on the income derived from the big forest would be required to be deducted. The Court noted that such an approach would defeat the purpose of the rule. The Court then turned to several authorities that had been cited during the arguments. Lord Sumner, speaking in Brooks v. The Commissioner of Inland Revenue, observed succinctly that “for super‑tax tax is another and a new tax none the less, though it is an additional duty of Income Tax.” The Court also referred to the decision in Bates, In re: Selmes v. Bates, where a testator had bequeathed to his wife “such a sum in every year as after deduction of the income tax for the time being payable in respect thereof will leave a clear sum of pound 2000.” The Court held that the wife was entitled to receive the pound 2000 free of income‑tax only and that she was not entitled to any amount in respect of super‑tax. Accordingly, the trustees were required to pay the annuity after deducting the income‑tax that was payable on that annuity. When the argument was raised that the annuity should also be free from super‑tax, Russell J. rejected it and explained that super‑tax was not a charge in respect of any particular annuity or sum but a charge on the recipient’s whole income, and therefore it was not a matter that the trustees could be charged with or concerned about. He further observed that the testator’s intention was to give the widow a yearly sum of pound 2500 clear of all deductions for which the trustees were accountable, but that this did not include super‑tax, which the widow must pay herself. The learned judge added that “No super‑tax is really payable ‘in respect of’ this sum.” Although that judgment was based on the specific provisions of a will, the Court found its reasoning instructive. The Court pointed out that in the Bates case, income‑tax was deductible in respect of the sum bequeathed, whereas in the present matter income‑tax is deductible in respect of the income received from the big forest. Since super‑tax is not a charge in respect of the income from the big forest, the Court reasoned that, by parity of reasoning, the expression “income‑tax” used in clause (c) of rule 2(2) of Schedule I to the Act must be understood to exclude super‑tax. Finally, the Court referred to the decision in Reckitt, In re: Reckitt v. Reckitt, where a fund was left to trustees for investment and to pay out of the income of the investments “the annual sum of pound 5000 free of income‑tax” during the life of the annuitant. The Court of Appeal held that the annuitant was entitled to receive the sum without any deduction for super‑tax and that the trustees were required to discharge that obligation.

The Court observed that the trustees were required to pay the super‑tax that was payable in respect of the specified sum out of the income of the fund. It noted that the ultimate conclusion depended upon the provisions contained in the will. Lord Hanworth, M.R., distinguished the earlier decision in Bates, In re: Selmes v. Bates, on the ground that the judgment of Russell, J., was based on a reference to deductions and also on a direction to the trustees that the specified sum should be paid after deduction of income‑tax in respect thereof. Lord Hanworth further observed that, in the case before that court, there was no reference to any system or to any power of the trustees to make deductions; rather, the arrangement was that a total sum each year was to be paid free of income‑tax. The Court remarked that the Bates decision might be right or wrong on the construction of the will before the Court of Appeal, but it also pointed out that the features which distinguished the Bates case from the decision in Reckitt’s case were likewise present in the matter before it now. In the present case, the rule likewise empowers the prescribed authority to deduct from the gross income the income‑tax payable in respect of the income received from big forest. The Court held that the earlier decision was more applicable to the present case than the later one. Nevertheless, it concluded that English decisions on the construction of wills were of little assistance in construing the express provisions of rule 2(2)(c) of Schedule I to the Act, which must be interpreted on their own terms. Having regard to the terms of that rule, the Court reached the conclusion that income‑tax does not include super‑tax. Accordingly, the appeal was dismissed with costs, and the order of dismissal was recorded. (1933) 1 I.T.R. 1. (2 ) [1925] Ch. D. 157.